A surprisingly strong headline inflation reading wasn't enough to convince some economists the Reserve Bank board will stick to the sidelines when it meets on Melbourne Cup Day.
Financial markets have all but ruled out a rate cut on Tuesday, pricing in a just 4 per cent chance of a move, but six of 27 economists surveyed by Bloomberg aren't so sure.
The RBA logo.. Credit:Louie Douvis
Markets scaled back their expectations for more easing after third-quarter consumer price inflation last week came in at a surprisingly strong 0.7 per cent, for an annual rise of 1.3 per cent. But underlying inflation, which strips out volatile movements in food and petrol prices, remained sluggish in slipping to 0.4 per cent for the quarter, and 1.5 per cent over the year, well below the RBA's targeted band of 2-3 per cent.
Commonwealth Bank of Australia chief economist Michael Blythe is one of the few who expect the bank to cut, but admits it all comes down to whether the bank cares more about house prices and debt stability or persistently low inflation.
"The Reserve Bank is definitely looking for reasons not to cut and they've got plenty of things they could point to, but it would require them to back down on that housing view, which they're clearly reluctant to do," Mr Blythe said.
The housing market has given the RBA a headache in recent years, and governor Philip Lowe has described the picture as "mixed". The latest CoreLogic data showed Sydney home values up 3.5 per cent in the three months to September and Melbourne up 5 per cent, while price falls were recorded in Darwin, Perth and Brisbane.
"Most of what the bank says is along the lines of, the housing market is cooling," said Mr Blythe. "Which indicates they probably think it will be quarantined from another rate cut, if that's what happens."
The RBA has also changed its tone when it comes to unemployment. Since the cut at the August board meeting, employment has risen slightly but that has stemmed almost entirely from part-time jobs.
"It increasingly looks like the strong employment growth of last year was an aberration, unhinged from the reality of weak growth in domestic demand," said Paul Brennan, chief economist at Citi.
Citi also expects the bank to cut rates on Tuesday, and maintains overall inflation will stay low and expects advanced economy inflation to stabilise rather than continue its recent increase.
"We don't believe that the third-quarter inflation reading gives the RBA any confidence that inflation is heading back to the target," said Mr Brennan.
Last week's higher headline inflation reading surprised economists, but was largely attributed to a weather-related spike in fruit and vegetable prices.
"While some commodity price rises and a base effect have lifted yearly advanced economy CPI, muted inflation expectations, a slow closing of the global output and Citi's forecasts of a correction in key commodity prices next year should keep advanced economy inflation low for the foreseeable future," said Mr Brennan.
Mr Lowe's maiden speech also addressed the level of household debt, which stood at 186 per cent in the second quarter, the highest ever. However Mr Brennan points out that households are on aggregate a lower payer of interest debt when the whole household balance sheet is considered rather than just looking at the debt data in isolation.
"This is the approach the RBA takes. It therefore suggests we should be somewhat less concerned about the level of household debt for macroeconomic stability," he said.